Foolish to expect too much from IMF ‘bigging up’ State

Christine Legarde came, saw and pretty much conquered. The International Monetary Fund managing director’s comments about Ireland and the Irish were music to our ears and represent a very powerful endorsement of the Irish recovery story.

It’s a story that gets better with the telling. The latest iteration, by Davy’s global strategist Donal O’Mahony is particularly good. O’Mahony and his colleagues, writing in their uninvitingly titled
Monthly Debt Digest
, wrap up the promissory note deal, Croke Park II and the end of the bank guarantee to conclude that Ireland is within sight of debt sustainability and the holy grail of a ratings upgrade from Moody’s, who have us somewhere below Botswana.

Their prediction comes with a couple of caveats, the first being that we recoup some of the money “invested” in the banks by either selling them to private investors or getting the new European rescue fund – the European Stability Mechanism – to take out the Government.

Dark days
The other requirement is that the commitment of our European partners to review the terms of our bailout delivers something of substance. Neither of these two things is a given and that is where Madame Legarde comes in.

If someone had told you in the dark days of November 2010 that, within two years, the head of the IMF would be raising a glass to Ireland in Doheny & Nesbitts, the chances are you would have just felt sorry for the deluded fool. It is quite a turnaround. But apart from her very valuable “bigging up” of Ireland, what else can the IMF boss do for us?

The fund’s role in the troika is enigmatic. At one level, it always seems to be saying what we want to hear but can never turn its words into deeds. As far back as 2010, the IMF was reported to have been in favour of burning the senior bondholders of Irish banks, but the idea fizzled out in the face of opposition from just about everyone else. More recently it signalled a rethink on austerity in its
2013 World Economic Outlook
which recognised that the fiscal adjustments linked to the various troika programmes in Europe were having a much more detrimental impact on growth than had been expected. Despite this moment of clarity, the programmes for Ireland remain unaltered.

It would appear that the fund’s role in the troika is in the area of monitoring and implementation, which are also the areas in which it has far greater competence than either of the other two members – the European Central Bank and the European Commission.

But the real power seems to rest with the other two members and, in the case of the commission, more specifically with the two big funds that Europe created to undertake the bailouts; the European Financial Stability Facility and the European Financial Stability Mechanism. However, the commission does not have discretion when it comes to the funds, with the ultimate say so on what they do resting with the member state governments and in some cases, notably Germany, with the national parliaments.

The IMF can make powerful and credible arguments on Ireland’s behalf regarding rescheduling of the billions that we owe the EFSF and the ESM but its hand is not as strong as we might hope – not least because it steadfastly refuses to discuss rescheduling its own loans to Ireland on the hard to argue with basis that we get the same terms as all other debtors of the IMF.

The fund’s support is important but it might be unwise to expect too much to flow from it. The battle to wring concessions on the bailout debt and recapitalisation of the banks will be every bit as tough as the promissory note saga, one suspects.

Bailout loans
German politicians have already started to dig in for the fight.

Norbert Barthle – budgetary spokesman for the Christian Democrats and an Angela Merkel confidant – has poured cold water on any talk of a 15-year extension to the bailout loans. His comments are unsurprising, given that the Germans are still suffering a serious bout of indigestion from swallowing the promissory note rinky-dink. They also have to be viewed through the prism of election year politics in Germany.

You have to ask yourself if the woman with whom Michael Noonan wants to sup the black stuff in Doheny’s is actually Frau Merkel and not Madame Lagarde?

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